International investment location decisions

Abstract

In international 'location tournaments', governments compete for foreign investment with tax and other short-run incentives. Such tournaments can be won if agglomeration economies are sufficiently powerful to overcome investors' desire to spread investments as a hedge against risk. We focus on manufacturing investments by U.S. multinationals in the 1980s. Our econometric results suggest that agglomeration economies are indeed the dominant influence on investor calculations. Paradoxically, short-run incentives have limited apparent impact on location choice. We conclude that high-cost tournament play is unnecessary for countries with good infrastructure development, specialized input suppliers and an expanding domestic market.